HILSENRATH: The Fed Isn't Worried About Low Inflation

Hilsenrath is out with a new blog post on WSJ.com this afternoon aimed at one of the hottest topics surrounding Federal Reserve policy right now: persistently low inflation, which could keep the Federal Reserve from tapering monetary stimulus anytime soon.

New data on consumer prices out today revealed that consumer prices were up 1.7% on a year-over-year basis when stripping out food and energy, two volatile components that have been dragged down recently by a big sell-off in the commodity space.

The Fed's preferred measure of inflation, however – core personal consumption expenditures (PCE) – is only up 1.1% from a year ago, well short of the Fed's 2% inflation target.

Although the Fed's preferred inflation reading is showing much more disinflation (positive, but falling inflation) than the more traditional consumer price index out today, Hilsenrath just chalks this up to quirks in the way the two indices are calculated, and he asserts that "even though inflation measures have fallen sharply in recent months, Federal Reserve officials aren’t ringing alarm bells about it as they have done in the past."

Here's more from Hilsenrath:

One of [the quirks in PCE] is a measure known as “financial services furnished without payment.” This is the government’s way of tracking what households pay for bundled bank services like access to ATM machines or check-writing. “This would be any service provided by a bank for which there is no explicit payment,” says Brent Moulton, the associate director of the Bureau of Economic Analysis. Without a market price to go on, the Commerce Department imputes a cost to consumers for these services based on complex formulas that move as interest rates shift.

It turns out that right now interest rates are shifting in a way that drives down the imputed value of this service. In the first quarter the price of this service fell 2.2% from a year earlier and since the second quarter of 2011 it has fallen on average by 1% annually, according to the Bureau of Economic Analysis. These measures are down largely because interest rates are falling, Mr. Moulton said, not necessarily because the actual cost of the service is going down. Strip out the quirky number and the decline in core consumer prices was 0.2 percentage points less severe in the first quarter than the official figure, according to Bureau of Economic Analysis data. A measure which strips out all imputed prices in the core consumer price index was up 1.31% in March, again more than the 1.13% number.

Note: Earlier we reported in error that Hilsenrath told CNBC about "important messages" that the Federal Reserve would be delivering tomorrow. This was actually in reference to a story from August 2012.